Assume That Investors Require a Rate of Return of 10

Multiple Choice

Assume that investors require a rate of return of 10 percent to invest in a firm that pays a dividend of $2 per year. The price of the firm's stock is currently based on the assumption that the firm's dividend will remain constant. By how much will the price of the firm's stock increase if the firm begins to grow at a rate of 2 percent per year and is expected to continue to do so indefinitely?

A) $25
B) $20
C) $10
D) $5